What Can We Earn If We Invest in the Top Five Holdings of Berkshire Hathaway?

What Warren Buffett has done at Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B) is just amazing. As investors, you could easily benefit from his work by buying the stocks of Berkshire Hathaway and no time is too late for that. You could also buy the stocks that Buffett has bought. You can see the holdings of Berkshire Hathaway since 2000 and see what companies Buffett have been buying, selling, adding and reducing from GuruFocus.com.

For average investors, it is almost impossible to have a portfolio that contains all the stocks in Berkshire’s equity portfolio. Above all, not all stocks in the portfolio are bought by Buffett. It makes me wonder what if I just follow Buffett and invest only the top five holdings of Berkshire Hathaway. This coattail investing strategy mimics the trades of well-know and historically successful investors. In this way, will my return beat the market? Will my return beat the performance of Berkshire Hathaway itself? Based on my last research of market cycle analysis, I focus my eye on market peak-to-peak from 2000 to 2012 and set Jan. 1, 2000 as my start date.

Assumptions and Facts

1. We had $10,000 to invest on Jan. 1, 2000, and invested equally into the top five holding of Berkshire Hathaway.

2. We would compare our market value of the top five holdings each month with the market value if we invest directly into SPDR S&P 500 ETF (SPY). We could also compare with investing directly into Berkshire Hathaway.

3. The dividends we got would reinvest into the same stock immediately.

4. All the prices we used in this research were adjusted close prices for splits and dividends.

5. If any of our top five holdings was being acquired, we would reinvest this into the new top five holdings.

Scenarios

1. We invested our money in the top five holdings of Berkshire Hathaway on Jan, 3, 2000, and held these stocks until Jan. 2, 2013.

2. We followed exactly the same top five holdings of Berkshire Hathaway since Jan. 3, 2000, made adjustments quarterly until Jan 2, 2013.

Data and Results

The following table 1 shows the top five holding of Berkshire Hathaway since Jan. 3, 2000:

From Table 1, we can see we invested $2000 equally in The Coca Cola Company (NYSE:KO), American Express Company (NYSE:AXP), The Gillette Company, Washington Post Company (WPO) and Wesco Financial Corporation (WSC) on Jan. 3, 2000. Without rebalance, we would hold these stocks until now. Yet the Gillette Company was acquired by P&G, we cashed out our money invested in the Gillette Company on Oct. 3, 2005 and reinvested it into P&G (NYSE:PG). Similarly, when Wesco Financial Corporation was acquired by Berkshire Hathaway (NYSE:BRK.A), we cashed out our money and reinvested it into Wells Fargo & Company (NYSE:WFC). The following Table 2 shows our investment strategy and portfolio’s components quarterly.

In this way, we add all the money of our top five holdings and got the total assets of portfolio 1 each month. Instead of investing the top five holdings of Berkshire Hathaway, we could invest our $10000 directly into SPDR S&P 500 (SPY) and see our returns. Compared with value of portfolio 1, SPY and BRK.A, as well as the return of portfolio 1, SPY and BRK.A, we could easily see whether we can beat the market or beat BRK.A if we invested only the top five holdings of Berkshire Hathaway.

From Chart 1, we can see our portfolio 1 outperformed the market for a quite long time. Obviously, BRK.A beat the market even more. Chart 2 shows how much our portfolio 1 could outperform the S&P 500. It is calculated by (Value of Portfolio/Value of SPY-1). From Chart 2, we can clearly see that our portfolio 1 always beat the market from Nov. 1, 2000 to Jan. 3, 2013, yet our portfolio 1 cannot beat BRK.A from March 2000. Chart 3 indicates the monthly return we could earn. We can see our portfolio 1 and BRK.A followed the market trend, yet outperformed it. The total return for investing in portfolio 1 is 72.99%, the total return for investing SPY is 33.51%, and the total return for investing BRK.A is 174.51% if we held stocks until now.

The Table 2 shows the annualized performance of the S&P 500, portfolio 1 and BRK.A. We can see our portfolio 1 did a good job when market was down. In order not to be misled by one year good or bad performance data, we use five-year rolling returns which show on Table 3. According to my last research of five-year rolling analysis, we can see portfolio 1 outperformed the market 55.56% of the time. However, portfolio 1 did not perform as well as S&P 500 during 2007-2011, and 2008-2012. This is mainly because its bad performance in 2010. And the reason for this bad performance is that the Washington Post Company did a really bad job at that time. Unfortunately, portfolio 1 only outperformed BRK.A 33.33% of the time.

Scenario 2: Rebalance Each Time Top Five Holdings Changed

Unlike the investment strategy we discussed earlier, we followed exactly the same top five holdings of Berkshire Hathaway since Jan. 3, 2000, as shows on Table 1, made adjustments quarterly. We call it portfolio 2.

From Chart 4 and Chart 5, we can clearly see our portfolio 2 outperformed the market from June 1, 2001 to Jan. 3, 2013. Obviously BRK.A beat the market even more. Chart 6 indicates that our portfolio 2 followed the market trend, yet outperformed it. The total return for investing in portfolio 2 is 136.89%, the total return for investing SPY is 33.51%, and the total return for investing BRK.A is 174.51% if we held stocks until now.

It is easily observable from Table 5 and Table 6 that our portfolio 2 did a good job, even when the market was down from 2002 to 2008. According to my last research of five-year rolling analysis, we can see portfolio 2 always outperformed the market. And the reason for this good performance is that portfolio 2 actively tracked the Berkshire Hathaway and made adjustments to its holdings in order to maximize the return. However, portfolio 1 only outperformed BRK.A 66.67% of the time.

Conclusion

Above results show investors will outperform the market by investing in the top five holdings of Berkshire Hathaway without rebalancing each quarter (need to rebalance when any of our top five holdings was acquired). But they will do much better if they track the top five holdings of Berkshire Hathaway and rebalance when top five holdings changed. This is much more profitable and can beat the market all the time. Though this might not be the case for all the other funds, it shows its advantage over passive investment strategy in our research.

Putting all the money into Berkshire stocks would be more profitable. However, timing may have played a role here. In January 2000, Berkshire was traded at a two-year low, while currently it is traded at a historical high. The market sentiment on Berkshire certainly contributed to the gain of the stock.

Comments

IMO: every DIY investor needs to ask themself this question at some point... "what portion of my portfolio should consist of BRK?" The reason is pretty obvious - steady market out-performance over a long time period.

BRK.B is 20% of my portfolio and I plan on keeping it that way for my a long time. I believe it is important to pay homage to the greatest investor in the world by keeping some of his stock. Keeps me humble.

Investments to the real estate market are not so risky and profits are very high. If you have a perfectly designed strategy and considered all risks then you will beat the market. This very fast service that helps may be very useful for building a perfect investment strategy.

This actually makes sence. There are a few extremely successful and reputable investors in the world with high ROI, like Warren Buffett (Trades, Portfolio) or Donald Trump. So if you know where they invest their fast cash, it would be smart to invest there also. Not all their investments have positive ROI, but most are.

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